Castles in the air: Afghans pay a heavy price for uncertainty

Afghans play on a trampoline along Qargha Lake, on the outskirts of Kabul April 28, 2014. REUTERS/Mohammad Ismail

By Jeremy Laurence and Mirwais Harooni

KABUL, May 19 (Reuters) - A bored security guard, a Kalashnikov rifle over his shoulder, stands guard alone outside an idle construction site for a 10-storey building in downtown Kabul, one of more than a dozen concrete shells with not a single construction worker in sight.

It was meant to be boom-time after decades of war and privation. Over the past few years, shiny new shopping malls started to spring up around the Afghan capital and construction cranes dotted Kabul's spectacular, snow-capped horizon.

But the cranes have since disappeared and many buildings are empty and unfinished, having failed to reach completion before the money began to dry up.

Business has ground to a halt across much of Afghanistan. Political uncertainty abounds before another presidential vote and security fears are growing as the last foreign combat troops prepare to leave.

"To invest in such an environment would be craziness," acknowledges Hameedullah Omar, marketing manager of a deserted nine-storey office complex in Kabul's main shopping district that was completed only last year.

Foreign donors worried about deteriorating security are leaving as Western forces wind down operations, leaving aid-dependent Kabul to manage its threadbare finances on its own.

The United States and Britain, two of the biggest donors, have already cut aid by up to half.

International aid groups, which provide a lifeline for marginalized Afghans, say funds are drying up fast. One U.S. non-profit group that runs 13 schools for 3,000 girls says it hasn't paid its teachers for more than a year.

Property prices have slumped as much 50 percent, rents are down 75 percent by some counts and investors have pulled funding from construction projects.

The afghani currency has also fallen and is now at around 57 to the dollar, from 52 at the start of 2013.

"Investment is mostly on hold in Afghanistan," the deputy chief of the central bank, Khan Afzal Hadawal, told Reuters.

International institutions expect Afghanistan's GDP growth to fall from a high of about 14 percent in 2012 to about 3.5 percent this year. The World Bank has said more uncertainty could dampen growth further this year.

The International Crisis Group think tank said in a report released last week that the number of attacks by Islamist insurgents had risen since the drawdown of foreign troops began, and forecast a bloody future unless there was more foreign assistance.

BSA-EFFECT BITES

Investors and foreign donors have hit the 'pause' button, anxious about what lies ahead as Afghanistan strives to go it alone after nearly 13 years during which hundreds of billions of dollars of foreign capital kept it afloat.

Their main concern stems from a year-end deadline for foreign combat troops to leave, and stalled negotiations between Kabul and Washington on a Bilateral Security Agreement (BSA) to allow a small force of U.S. troops to stay after Dec. 31.

"The uncertain fate of the BSA and election runoff has damaged all businesses," said Omar. "It is not only ours but all around the country people live in such an uncertain future."

After years of bitter wrangling over a range of issues, President Hamid Karzai has refused to put his name to the security pact, saying he would leave it to his successor.

But a presidential vote last month failed to produce an outright winner, setting the stage for a second round run-off - and yet more uncertainty. The process has been delayed further by investigations into unprecedented levels of fraud.

That means it could be months before a new president is inaugurated, leaving little time to sign the BSA.

The two men poised to contest the second round run-off next month, Abdullah Abdullah and Ashraf Ghani, have vowed to complete the deal that will allow some U.S. troops to stay for counterinsurgency and training purposes.

"If the run-off takes a long time and the security pact is not signed soon, the impact would be even more severe," said Mohammad Ismail Afzal, manager of the Zia Shuja construction firm. "Many businessmen have already taken their money out, and the rest will take it out, too."

Afzal says his company alone has experienced an 80 percent fall in business since the start of last year.

Overall, the Afghanistan Chamber of Commerce says investment is down 40 percent compared with a year ago.

FOREIGNERS CAUTIOUS

Hadawal, the central bank deputy, said talks with four unidentified foreign banks interested in tapping into the Afghan market have been put on hold.

"They are interested to come, but it is important for every investor to see what is going to happen, if there is continuity," he said.

London-based bank Standard Chartered was the first major foreign bank to enter Afghanistan amid a banking sector boom after the fall of the Taliban in 2001, but it backed out due to security fears in late 2012.

Kabul's residential property market, which experienced a boom in the years after U.S.-led forces drove the Islamist Taliban from power in 2001, is also in the doldrums.

Foreign contractors arrived en masse in Afghanistan, gobbling up hundreds of millions of dollars, mostly dished out by the U.S. government, to build everything from roads to schools and hospitals.

U.S. auditors said Washington's relief and reconstruction bill in Afghanistan from 2002 topped $100 billion this year.

"A house which rented for $8,000 last year is now $2,000, and housing prices have fallen by 50 percent," said Jani Mohammadzai, owner of the Nawi Afghan Durani estate agency.

"Foreign companies have already left ... and even if the BSA is signed and the election goes smoothly, I don't think the situation is going to get any better."

AID HITS THE SKIDS

The hardest hit are the poor who depend on foreign aid. More than half the population still lives below the poverty line.

Aid fell to $508 million in 2013 from $894 million in 2011, according to U.N. data. Less than a fifth of a $406 million United Nations' humanitarian plan for Afghanistan has been funded so far this year.

At the start of the year, U.S. lawmakers halved civilian aid for Afghanistan amid concerns about waste and fraud. Britain has pledged $178 million a year from 2012 to 2017, down from $296 million per year between 2009 and 2011, official data shows.

The aid cuts are already hitting projects around the country. Aid Afghanistan for Education (AAE), which runs schools for girls, lost $1 million in annual funding from USAID last year and hasn't paid its teachers for a year.

"As the economic situation gets bad, the security becomes even worse," said Sarwin, 28, a teacher at one of AAE's schools in Kabul. "If the international community leaves Afghanistan by itself there will be another civil war like we had in the 1990s."

The group's founder, Hassina Sherjan, said foreign donors were waiting to see how cooperative the new government would be with the international community, as well as assessing the security risk of staying in Afghanistan.

"Can people really work here?," Sherjan says. "I'm hoping all will be resolved in the next month or two, because we can't go on like this." (Writing by Jeremy Laurence; Editing by Paul Tait)

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